Securities Finance Research 2023 - Bond-Linked Equity factors enhance signal Equity Short Interest

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While the short interest metrics derived from the Securities Finance dataset have a long and established track record that identifies short interest as a strong leading indicator of future equity returns, using fixed income signals for equity trading is less explored due to the complexities in obtaining and mapping security identifiers and aggregating data from multiple issues back to a single corporate issuer.

This gap was addressed last year with the launch of bond-linked equity factors where Alpha Signals and Bond Pricing businesses collaborated to introduce 19 base factors (and seven variants to extend coverage) using proprietary point-in-time corporate mappings, bond return and curve data. Please refer to the bond-linked equity signals research paper which highlights the robustness of these factors as leading indicators of forward equity returns along with their low commonality with traditional quant factors. The research also portrays benefits to a value-momentum manager by incorporating bond-linked signals as an overlay.

In this research study, we examine whether bond to equity factors can be combined with short sentiment factors for an enhanced security selection process in large cap equities in the US and Developed Europe. We employ the top performing Active Utilization and the Bond Value Divergence factors from the proprietary factor suites and run historical simulations that imitate a long-short strategy based on a monthly rebalance schedule during the period April 2015 - July 2023.

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.